11
Global currency investors are increasingly turning their attention to the Swiss franc as an alternative funding currency for carry trades following a rare intervention by the United States and Japan to support the Japanese yen, according to Reuters.
The shift reflects a broader reassessment of one of the foreign-exchange market’s most established strategies. Carry trades involve borrowing in a currency with relatively low interest rates and investing the proceeds in higher-yielding assets elsewhere. The Japanese yen has traditionally been one of the preferred funding currencies because of Japan’s historically low interest rates. However, the prospect of further official intervention has increased the risks associated with betting against the yen.
The Swiss franc could increasingly fill that role. Switzerland’s policy rate is around zero, compared with Japan’s 1%, while the franc has recently shown signs of weakening after remaining unusually strong against major currencies. Reuters reported that the franc has fallen about 4% against the euro from its March peak and roughly 7% against the dollar from its January highs.
Why the franc is attracting investors
The appeal of the franc lies not simply in its low borrowing cost but also in its comparatively low volatility. For carry-trade investors, predictable currency movements are crucial because a sudden appreciation in the funding currency can quickly erase the returns generated from higher-yielding investments.
The yen’s recent experience demonstrates that risk. Following the coordinated U.S.-Japanese intervention, traders became more cautious about maintaining large short-yen positions. Japan has already demonstrated its willingness to use foreign-exchange intervention to counter excessive currency weakness, creating the possibility of sharp and sudden losses for investors positioned against the yen.
The Swiss franc presents a different policy environment. The Swiss National Bank has historically been concerned about excessive appreciation of the currency because a stronger franc can undermine the competitiveness of Swiss exporters. Reuters noted that the SNB appears willing to use intervention to prevent an excessive rise in the currency, potentially reducing the risks for investors seeking to borrow francs.
A potential policy paradox for Switzerland
Ironically, a broader shift toward franc-funded carry trades could provide some relief for Switzerland. Increased borrowing and selling of francs could put downward pressure on the currency, helping exporters and reducing the need for the SNB to intervene directly.
That dynamic would be particularly significant because the franc remains structurally strong. Reuters reported that it is still around 12% higher against the euro than it was five years ago, despite its recent decline. A sustained weakening could therefore improve conditions for Switzerland’s export-oriented economy.
However, the strategy carries risks. The Swiss franc remains a traditional safe-haven currency, meaning that global financial stress could trigger demand for the currency precisely when investors are using it as a cheap funding source. Such a reversal could force investors to unwind their positions rapidly, potentially amplifying volatility across global markets.
The broader market implications
The potential migration from yen-funded to franc-funded carry trades illustrates how central-bank intervention can reshape global investment flows far beyond the targeted currency. By increasing the perceived risks of shorting the yen, U.S. and Japanese policymakers may unintentionally encourage investors to search for alternative sources of cheap funding.
At the same time, currency movements are being influenced by wider shifts in expectations for U.S. interest rates, Treasury yields and the dollar. The dollar weakened on Aug. 19 as U.S. Treasury plans to increase long-term bond buybacks pushed yields lower, while both the Swiss franc and yen strengthened against the dollar.
This environment suggests that global foreign-exchange markets are entering a more policy-sensitive phase. Investors are no longer assessing currencies solely through interest-rate differentials; the possibility of direct government or central-bank intervention is becoming an increasingly important component of risk management.
Conclusion
The Swiss franc is unlikely to replace the yen overnight. The shift remains at an early stage, and the scale of the yen-funded carry trade means that Japan will remain central to global currency strategies. Nevertheless, the franc’s combination of low interest rates, relatively low volatility and the SNB’s apparent tolerance for currency-management measures makes it an increasingly attractive candidate.
If investors continue moving toward franc-funded positions, the result could be a weaker Swiss currency, improved competitiveness for Swiss exporters and reduced pressure on the SNB to counter excessive franc strength. Conversely, a global risk-off episode could rapidly reverse the trend as investors rush toward the franc’s traditional safe-haven status.
The emerging trade therefore represents more than a simple shift between two low-yielding currencies. It highlights how intervention by major economies can alter the architecture of global carry trades and potentially redistribute currency risks across international markets.
